Banks Stood As Second Applicants To Skirt Ipo Cap

Banks, which were financing initial public offerings (IPOs), would append its name as second applicant and often the number of shares subscribed to was in excess of what the original applicant had applied for, the central bank has stated in its report to the Joint Parliamentary Committee (JPC) probing the market crisis of March 2001.

The Reserve Bank of India (RBI) has stated that it has examined the matter and "while sanctioning loans for subscribing to IPOs, the banks were putting their names as the second applicant in the application form." There were allegations that the extra shares subscribed for would be owned by the banks concerned and this practice helped them to circumvent the norms on advancing finance for IPOs.

The banks have contended in their turn that by putting its name as a joint applicant, "the bank is not the beneficial owner of the shares, since it has not incurred any expenditure for purchase of the shares." The banks defence was that by putting their name as the second applicant they were merely protecting their rights and interests. "The bank's name is added as a second holder of the shares so that the applicant on its own, without the knowledge and consent of the bank, cannot sell or dispose off the shares."

Under the current guidelines, banks are permitted to grant advances for subscription to IPOs only to individuals and the maximum amount that can be extended to an individual is Rs 10 lakh . Further under the extant guidelines, the finance extended has to be reckoned as exposure to the capital market.

Banks, however, take cover behind the subscriptions made by individuals to boost their exposure to the market. RBI has however clarified in its reply that this disproportionate financing of IPOs by banks "has halted after issue of the guidelines of November 2000."